Chapter 13 Bankruptcy
Is Chapter 13 Bankruptcy the Solution for You?
Unlike Chapter 7 bankruptcy, in which unsecured debts are eliminated, a Chapter 13 bankruptcy case involves payment of past-due balances over a period of three to five years. People in difficult financial circumstances often choose Chapter 13 bankruptcy if they:
- Are struggling with secured debt, such as mortgage loans, and want to keep the property;
- Have too much income to qualify for Chapter 7 bankruptcy;
- They have non-exempt assets to protect, such as a large amount of equity in a home
- They just prefer to try to repay their debts on a more manageable schedule
They are struggling with tax debt that cannot be discharged in Chapter 7
How Does Chapter 13 Bankruptcy Work?
In a Chapter 13 bankruptcy case, the petitioner proposes a repayment plan. If the plan is confirmed by the court, the debtor will make regular monthly payments to the bankruptcy trustee. The trustee will then distribute those payments to creditors according to the plan.
At the same time, the debtor must continue to make new payments on time. Imagine, for example, that mortgage debt is included in a Chapter 13 bankruptcy plan. There is a $10,000 past-due balance and the regularly monthly mortgage payment is $1,000. Each month, the debtor will be required to make the scheduled plan payment to the trustee, and a portion of that payment will go toward the $10,000 mortgage arrears. At the same time, the debtor will make the $1,000 mortgage payment as it comes due each month. When the plan has been successfully completed, the past-due balance will have been satisfied and regularly scheduled mortgage payments will continue.
Who Can File for Chapter 13 Bankruptcy?
While Chapter 7 bankruptcy is open only to people whose income is below a certain threshold or who have low income relative to their debts, the restrictions on Chapter 13 filing are much simpler. In order to qualify for Chapter 13 bankruptcy, a debtor must:
- Have regular income from which to make payments under the Chapter 13 plan, and
- Have unsecured debt of $394725 or less and secured debt of $1,184,200 or less
Benefits of Chapter 13 Bankruptcy
One of the key benefits of a Chapter 13 bankruptcy plan is that as long as the debtor fulfills his or her obligations under the plan, such as keeping plan payments current, creditors cannot take other action to pursue those past-due balances. In fact, creditors are limited in the fees and penalties they can apply. That means peace of mind many struggling with debt can barely remember, and an end to juggling debts based on which creditor applies the most pressure.
Since the bankruptcy case is active during the life of the repayment plan, the debtor enjoys additional protections, such as continuation of the automatic stay and ease of returning to court if creditors don’t play by the rules.
When the plan has been successfully completed, some remaining unsecured debt may be discharged, leaving the debtor to start fresh with most or all accounts current.